FREE CPA TCP PRACTICE

Practice entity tax and property-planning decisions

This public teaching set uses simplified situations to practice the decision steps behind entity tax planning. It is not an official CPA Exam question set, a prediction report, or tax advice for a specific taxpayer.

Use each exercise to name the rule, identify the key fact, and explain why the other choices do not fit. The examples are separate from protected prediction reports and can be used as repeatable practice.

Practice the skill, then review the reasoning

PRACTICE 1

A corporation wants to retain cash for a planned production-line expansion. Which record most directly supports a business reason for retaining earnings?

A specific, documented expansion budget and timeline.An owner's personal wish to defer all tax.No minutes or forecasts.A list of the owner's household bills.

PRACTICE 2

A partnership reports taxable income to a partner on Schedule K-1 but keeps cash for inventory purchases. What should the partner review first?

Whether the K-1 allocation is reportable even though cash was retained.Whether the partnership cash automatically becomes tax-exempt.Whether the partner can ignore basis tracking.Whether the cash is a municipal-bond coupon.

PRACTICE 3

A business buys equipment for $72,000 and uses it 75% for business. Assume no credits or other basis reductions. What is the depreciation basis? Enter dollars.

Your answer (dollars)

PRACTICE 4

In a simplified installment sale, property sells for $160,000 with a $100,000 adjusted basis. There is no debt, interest, or selling expense. If the seller receives a $40,000 principal payment this year, what gain is recognized this year? Enter dollars.

Your answer (dollars)

Separate the entity from the owner

Start by identifying the taxpayer. A C corporation, its shareholder, a partnership, and a partner can all have separate tax consequences from one business event. A corporate payment may have both entity-level and owner-level effects.

For pass-through entities, do not treat cash as the sole measure of taxable income. A K-1 allocation can be taxable even if cash stays in the business. Keep a basis schedule so losses and distributions are analyzed with the right starting point.

Document the date that controls

Tax timing often depends on a factual date. Depreciation begins when property is ready and available for a specific use, not merely when ordered or paid for. Keep purchase, delivery, installation, and ready-for-use records together.

For installment sales, separate interest from principal. The gain calculation uses the gross-profit percentage on the qualifying principal component, so a payment schedule should show each part clearly.

Map basis before modeling a sale

A property file should show the starting basis, capital improvements, depreciation, liabilities, and selling costs. This lets you calculate adjusted basis and amount realized without relying on a single closing statement.

Deferral planning changes timing and basis. When a rule permits gain postponement, ask where the gain goes next. For example, postponed involuntary-conversion gain generally reduces replacement-property basis.

Turn a fact pattern into a planning memo

A short planning memo can be more useful than a long rule list. State the transaction, the taxpayer, the dates, the basis or cash numbers, the desired business result, and the open questions. Then list the records still needed.

This approach is useful for entity selection, compensation, reimbursements, asset purchases, and property sales. It makes assumptions visible before a tax return or contract locks them in.

Questions about this practice

Is an LLC automatically taxed as a partnership?

No. State-law LLC status does not itself settle federal income-tax classification. Ownership facts and any valid election matter, so identify both legal form and federal tax treatment.

Why can a partner owe tax without receiving cash?

Partnership income is generally passed through based on the partner’s distributive share. Cash may be retained for working capital, so income allocation and distribution timing need separate tracking.

What records matter most for a property sale?

Keep acquisition cost, improvements, depreciation, debt payoff, selling expenses, and closing documents. Those records support adjusted basis and amount realized.

Can this practice convert a score to an official CPA Exam result?

No. These are original public teaching exercises. They do not create an official score, scaled-score conversion, or guaranteed outcome.

References

Updated October 25, 2026 · PassPredictor